This question is looming as a key issue for voters at the next federal election.  Abolition of such payments from the tax office  is a smart suggestion from public policy think tank, Melbourne’s Grattan Institute, originators of another Labor policy revenue proposal, the elimination of negative gearing, in combination with an increase in capital gains tax to 75% of the marginal tax rate.

For a Labor Party in office, calculations suggest that it would be a $59 billion treasure chest, to which can be added about $2 billion if negative gearing was abolished as well. This could fund many vote winning election promises for their time in office.

The counter-argument from the Coalition is that it would be a savage tax grab that would hurt thousands of low income retirees who may have income producing share-portfolios, and depend on their imputation credits to pay for items they could not otherwise afford.

The problem is that both arguments are valid. Retirees range from the very wealthy when they first access their superannuation, to those a decade or two on from retirement, who depend on the pension but still have some residual assets.

Both groups under current arrangements pay little or no tax. But how can you tax them fairly when there are such asset extremes? Recent retirees have much larger lump sums but they also have larger financial commitments for the future to meet.

It seems to me that the fairest solution is to tax retirees on their drawdowns, rather than raiding their capital, the source of future income. This would ensure fairness, and discourage excessive expenditure.

Categories: National issues, Superannuation

Tags: Grattan Institute, Imputation credits